1. Field of the Invention
The present invention relates to a new technology to underwrite group disability insurance. In particular, the present invention relates to predicting the expected claims to be made by a group based on pooled historical data of claims for disability insurance and pooled historical data of medical claims.
2. Background Art
Group insurance for Long Term Disability (LTD) and Short Term Disability (STD) for employees is widely available. In order to set appropriate premiums for these risks it is necessary to estimate the likelihood of the insured events (number of disabilities) and the severity (or cost) of each event, for each insured group. Because of the relative rarity of these events for long term disability, the experience of a group is too small to provide reliable estimates for any but the largest groups (e.g., with ten thousand or more employees).
The following is an example illustrating the risk profile presented by groups of modest size, in this case for a group of 500 employees. It assumes that the binominal distribution is an accurate representation of the likelihood of disability. A 90% confidence interval is calculated. The following table lists the range of number of long term disability claims in the confidence interval at 3 different probabilities for the event.
TABLE 1Confidence Interval Example90% Confidence IntervalProbabilityLower BoundUpper Bound.00102.00505.01029
If a group has 2 events, it is in the 90% confidence interval for probabilities 0.001, 0.005 and 0.010 or a potential range of a 10-fold difference in true underlying probabilities for the event. This could result in a 10-fold difference in premium. If 0 or 1 event occurs, the underlying rate could be a 0.001 or 0.005 or a 5-fold difference in the true probability. Therefore, refined analytic methods are needed for accurate premium rate settings to reflect the group's underlying risk since the 5-fold or 10-fold difference in risk would turn into a 5-fold or 10-fold difference in insurance premium. The 5-fold or 10-fold range in risk and premium should be unacceptable to both the insurer and the insured.
The alternative actuarial approach uses estimates of group risk based on the age and gender (demographics) of each group's employees by using tables based on data pooled from many groups (i.e., manual rates). For example, the likelihood of a 20 year old male having a long term disability claim in a year is about 1/1,000 and the likelihood for a 62 years old male is about 10/1,000. The group risk is calculated by summing each eligible employee's demographic risk, the sum being the group's base risk. The group's experience may be used to adjust (usually done via a weighted average) the demographic risk higher or lower, depending upon the historical experience. While the demographic incidence rates may be modified by the industrial codes and geographic location of specific groups they do not specifically adjust for the considerable variation in the underlying morbidity of employees which underlies the risks of long term disability claims. The experience based rates adjust for the historical or backward looking component of underlying morbidity, where people still on long term disability are not part of the current insured risk (i.e., they do not contribute to the forward looking morbidity risk of the insured group since they are not part of its workforce unless they come back to work and they are no longer disabled).
Accordingly, there is a need for underwriting methods that address groups of modest size and accounts for the underlying morbidity of the employees making up a group.